Recovery Outlook | Smart Chart Investor

Sunday April 12, 2020

The broader market surged up to the midline (red horizontal line that represents the halfway point) last week recovering, almost to the penny, half of the Corona Crash from the February peak. The midline of a recent expansion or collapse is a typical retracement level and this particular one aligns perfectly with mean (neutral) pricing from the beginning of the massive consolidation zone beginning in 2018.

In three short (L O N G) weeks the broader market has regained neutral value from both an intermediate (28 month) and short term perspective. This is what we are looking for. Now, we want to see price action remain above the all important green ascending trend line to begin a recovery and get back on track with the expansion.

The speed of the recovery, of course, is dependent on the economic fallout from pushing the pause button on the world economy. From a technical perspective we want to see separation in time and price from the March 23rd low with a gradual chop into a retest of ascending support (green line) where we get a retest of that very important ascending level and subsequent reversal higher. This is the kind price action that would gradually reduce risk and contribute to a recovery.

Fundamentally, this would track additional data that would contribute to a better understanding of the economic fallout and relieve some of the selling pressure associated with the uncertainty and fear thereby reducing the risk of a deeper collapse.

So, while we understand the future is generally unknown we do know we can draw conclusions from observing and measuring historical price data and price tracking projections can be made with high accuracy. Some examples here and many more available.

The following future price track projection for SPY is what a recovery is likely to look like. Of course, there are more unknowns now associated with our current environment than in “normal” times so projecting a price track is a bit more challenging.

You can find more information about cycle rotation analysis here.

SPDR’s S&P 500 Trust Series ETF (SPY)..2018-2022

I must stress to you that the current environment makes it very challenging to project future price action. While we have projected virtually every significant broader market reversal (before they happened) during 2019 and 2020 this time is certainly more difficult.

This is what I wrote on February 17th..before the Corona Crash..

“Short term, the model shows another dip soon. Before the end of the month the Dow Jones Industrial Average could begin another 1,000 point retracement (price adjustment) to the ascending pink line support, just like it did two weeks ago.”

“If you want to take some profits, now would be a good time. I would especially recommend this on any leveraged products you might own. In addition, you can take advantage of adding to or initiating new positions at likely lower levels.”

“I think this will be another steep and deep affair just like two weeks ago with another surge higher from the buy zone in early March. The projected short term reversals are the red and green circles I drew on the charts. The price forecast is drawn in white.”

Never in my wildest dreams did I think steep and deep would turn into a 12,000 point disaster. So, while we can be highly accurate in our modeling remember we are in an extremely challenging environment.

On the other hand, it’s times like this that historically provide the greatest opportunities. We know the potential reversal levels before they happen and we know reversals are where expansions begin and end.

My opinion is that the March 23rd/24th reversal was the bottom. I don’t think we will revisit that low any time soon and I think the worst is behind us. With that said, remember this is just my opinion. But, the March 23rd bottom does provide a floor for managing risk and managing risk is the foundation of everything I do.

There are hundreds of individual stocks that appear to have bottomed as well. Breadth is improving with more individual stocks contributing to the recent surge and the Fed pump doesn’t look like it’s going to end any time soon. So, with a potential rolling reentry to getting back to work and ramping the economic engine back up, absent any more horrific virus news, we might have already seen the worst.

Here are the top five individual stocks I was asked about this week. Note my price track projections and support (risk) levels.